MIKE: This is Mike Decker and Brian Decker from Decker Talk’s Radio Protect Your Retirement and Brian Decker, who’s a licensed financial planner and a fiduciary. I know we talk about that a lot. That’s an important word there; fiduciary out of Kirkland, Washington. Like the intro said we’ve got a great show lined up here; tax reform, hidden costs of bankers and brokers, then we’re going to go into specifics about retirement planning, but Brian I wanted to just throw the ball in your court. You’ve got a great story of where you started and how you ended up focusing your career on retirement planning. Can you go into that? And the reason why I want to ask you, for the listeners to know why I’m asking this, is we’re going to talk about the hidden costs and fees, what bankers and brokers don’t tell you about, so Brian, correct me if I’m wrong. You started as a banker and broker years ago, right?
BRIAN: Absolutely, 30 years ago, 1986, so 31 years ago, I started out and was told to use the asset allocation pie chart for diversification, reduction of risk with a buy and hold strategy, and then the next year, 1987 came around; Black Monday, October 19th, 550 point drop in one day. The next day biggest client, no appointment, comes storming into the office, walks right past the receptionist, throws open my door, leans over my desk, and says Brian you lost my family 250,000 dollars that we can’t afford to lose, and I gave him the song and dance that we bought good stocks.
BRIAN: We have good positions. We haven’t done anything wrong. It’ll recover. Fortunately, that was a one day event and it did recover, but I knew in my mind that I would never put myself or any client in that position again. I knew that buy and hold didn’t work, and it didn’t make sense for people over 50 years old because the typical… this is more information, Mike, than I promised.
MIKE: This is great though.
BRIAN: This is a good set up for what we’re going to talk about today, but I knew that if you’re in your 20’s, 30’s, and 40’s, and you’re getting a paycheck you can take the market hits and ride them out, but when you’ve taken 40 years to gather a tremendous asset base, and then you take a hit of 30 percent of that, and it takes four years to earn it back, and you’re drawing money on it.
BRIAN: Mathematically that doesn’t make sense. It doesn’t matter, if you’ve had Wall Street training or not. This is common sense. So, I knew that that didn’t work. I knew that diversification of… so first of all I knew that buy and hold didn’t work, number one. Number two I knew that diversification goes out the window when the markets have these sell offs every seven or eight years, so Decker Talk Radio listeners, there’s a pattern that we’ve had for many decades. Markets get creamed on schedule every seven or eight years.
BRIAN: 2008, unmistakable. October of ’07 and March of ’09 that was a 55 percent drop. Seven years before that was 2001, the Twin Towers go down, the middle of a three-year bear market where 50-plus percent comes out, [CLEARS THROAT]. Seven years before that was 1994. Iraq had invaded Kuwait. Interest rates spiked, the economy was in recession. The stock market struggled. Seven years before that was 1987, Black Monday, October 19th, 30 percent drop in one day.
BRIAN: Seven years before that was 1980, interests rates were sky high, two-year recession. ’80 to ’82, the markets dropped over 40 percent. Seven years before that was the bear market of 1973, ’74 where 44 percent drop occurred. Seven years before that was ’66, ’67 bear market where over 40 percent drop in the market, and it keeps going. So right now, we are in year nine because the markets bottomed in March of 2009 when this bull market started.
BRIAN: We are in year nine of a market cycle that typically has a 20 percent or greater drop every seven or eight years. Of our stock markets has it gone longer, and that was in the 90’s when it went 10 years, so we are very definitely long in the tooth waiting for this bear market, the next bear market to hit. So, two things; number one, I knew that buy and hold didn’t make any sense, number one. Number two, I knew that diversification goes down out the window, Mike, when markets drop over 30 percent.
BRIAN: When you have a market meltdown it doesn’t matter if it’s midcap, large cap, small caps, emerging markets, internationals, a-everything gets hit, and I did my own study in 2008. I put an equal amount of large cap, midcap, small cap growth value, international emerging markets, ETF’s in, ran them through the calendar year of 2008 and the results were net of fees, they produced no benefit.
BRIAN: Diversification goes out the window during a panic market selloff, so there’s some foundational fundamental things that don’t make sense that the bankers and brokers are doing right now, Mike.
MIKE: Now, I want to interject you quick and ask you about buy and hold, and here’s why. You’ve said before, Brian, that right now arguably could be considered the most difficult time to retire. Would you agree?
BRIAN: Yes, we tell people that we’re in a situation where we have near record low interest rates and during a flat market cycle. Stock markets don’t trend, they cycle, and the gain from January 1 of 2000 in the last 16 years is less than four percent per year. So, we have what is easily the most difficult time in the last 100 years to be retired and to expect your portfolio to finance your retirement, number one, or number two; save for retirement and have your portfolio help you beyond your actual contributions.
MIKE: Okay, so that being said we can establish that people are nervous. I would believe people are nervous about the retirements and getting the gains that they want, and so the buy and hold strategy, I’m just going to be the advocate for the listener here. Buy and hold, it might be with familiarity what they’re comfortable with. If I worked at Boeing for 30 years I’m probably going to believe that they’re a good company, or Microsoft, or any other corporation, and think, you know, at least I can buy and hold it because I know that they’re good as a personal connection here, and you probably see this with the clients that come in and talk about what their plan is with a certain stock, and how they want to buy and hold it.
MIKE: And I’m going to quote Warren Buffett real quick before I get to the question, and we quote Warren Buffett all the time. Warren Buffett said the only two prices of stock that really matter are when you bought it and when you sell it, which is kind of code for buy and sell.
BRIAN: Buy and hold.
MIKE: Or buy and hold, excuse me. That all being said, how come buy and hold doesn’t work in retirement? And you kind of answered it saying it doesn’t work in your retirement as opposed to your 20’s, 30’s, and 40’s when you’re just waiting for it to grow, but is it a matter of pulling income, and you can’t decide when you have to pull income to sell the stock?
MIKE: Is it a matter of not leveraging your funds to grow fast enough? What is it about the buy and hold strategy because we can say that you can’t just hold your stock until they’re age 100. You need income every year of your life. So, what is it though specific about buy and hold that it really doesn’t work?
BRIAN: Okay, that’s a good point. There’s an accumulation strategy and a distribution strategy. An accumulation strategy is the Warren Buffett growth focused, portfolio focused strategy of buying good companies and holding on. You should be in an accumulation strategy in your 20’s, 30’s, and 40’s.
BRIAN: That’s the Warren Buffett growth side, but there’s a Warren Buffett income side. Warren Buffett needs a paycheck. Where is he going to get his paycheck? Once you retire your paycheck comes from your portfolio, so Warren Buffett needs… there’s a second side of Warren Buffett and that’s the producing of the paycheck. If you think all of your money should be at-risk in the stock market because Warren Buffett has a buy and hold strategy that flies in the face of common sense. So, distribution strategy is what we do. We have…
BRIAN: Now that opens up several things here, Mike, that are new to our listeners that haven’t heard us before, but at Decker Talk Radio and Decker Retirement Planning in Kirkland we have a spreadsheet that I’m just going to describe in 30 seconds. It lists all our client’s income sources, so social security, pension, rental income, portfolio income. We total it all up, minus taxes. That gives us annual and monthly income with a COLA; cost of living adjustment, and we always plan to age 100.
BRIAN: Then we take your investable funds, this is your 401K, your IRA, your CEP, your ROTH, your individual account, your joint account, all your investments, not your home and not your investment real estate. We have your investable assets go to zero at age 100 to see mathematically how much money you can draw for the rest of your life, number one, and number two; if you can retire. We use math. We use a calculator to see how much money you can draw for the rest of your life.
BRIAN: Now there’s two, there’s two groups of people that this is very important for, number one; the people that are thinking of retirement or within five years of retirement. They come into us and they see mathematically how much they can draw. Most of the time it’s a pleasant surprise, and we tell them that there’s going to be more money than their budget for the rest of their lives. Some people it’s not a…
BRIAN: It’s good news either way. They find that they have to work longer, and we put a plan together for them to help get them to that number that they need per month net of tax, but mathematically if you haven’t come seen our company and come in and done the numbers like we’re talking about, preretirement you can’t know that you can retire. You can’t know that, that’s number one. Number two; if you are retired you’re guessing on how much money you can draw from your portfolio unless you’ve run the numbers. Mike, this is a good point here. We’re fiduciaries. We should have people see what we’re talking about.
MIKE: And this is something you do in Kirkland with all of your clients at Decker Retirement Planning, correct?
BRIAN: Correct.
MIKE: Okay, one quick question before we do extend the offer here. You said that you zero out the assets to age 100. Is that a fixed number as it has to be age 100 and it has to zero out, or do people that will come in have the option of saying I want to leave X to my kids, or I think I’m going to live ‘till age 100. I mean do you have that flexibility?
BRIAN: Yes. Some people say that they want to leave X to their children, and some of those people, they’ve got one of two options. They can buy an insurance policy on their life with their children as beneficiaries and for about 10 or 15 cents on the dollar if they’re in good health they can transfer assets, but we are loyal to our clients. We do not want a dedication of assets to be to the detriment of their children, so when we show them that yes, they’re going to leave plenty of assets to their children even if they live to age 100 because of the conservative numbers we use for growth rates and for tax rates, then clients are fine.
BRIAN: But we do have a mathematical approach to finding out if you, number one, can retire, and number two, if you can retire how much money you can draw.
MIKE: We’ve talked about what the bankers and brokers are doing; buy and hold, asset allocation, but I don’t think that properly covers what we’re trying to cover here on today’s show.
MIKE: There’s a lot of hidden costs, a lot of hidden things behind the curtain, Brian. Can you go in from your personal experience and what you’ve seen and pull the curtains back even more of what’s really going on there?
BRIAN: Right, so let’s talk about the hidden cost of dealing with a banker or a broker. Now I tell you these things by experience. I hope that, if you’re at home you grab a piece of paper and a pencil. I hope you can write this down. If you’re in the car listening I hope you know you can go to our website and pull this up. This is the podcast. How are they going to know which podcast?
MIKE: On our website just go to the most recent show and you can catch this show and listen to it again, or Google Play or iTunes, just type in Protect Your Retirement, and we’ll pop up.
BRIAN: All right, so this is going to be very important information; how the hidden costs of dealing with a banker or broker. When you buy a bond from a banker or a broker and you think you’re seeing all your costs in the purchase you’re not. You’re seeing them gross. When a commission is paid, it’s rolled into the price of the bond and you have no idea unless you get a breakout of any of your bond purchases with a banker or broker.
BRIAN: When I say bond, I mean CD’s, treasuries, corporates, agencies, municipal bonds. It’s all rolled into the price and you should ask for a separation so that you can see what the commissions are. When bonds are purchased agency, you can split things out, so that’s number one. Number two; on stock purchases if you’re dealing with someone like Scott Trade, or Vanguard, or Fidelity, or Schwab, or TD Ameritrade, then what you’re dealing with is you’re seeing seven dollars, eight dollars, nine dollars, ten dollars, whatever, commission that goes not to the broker but to the custodian.
BRIAN: So, we’re fine with that. What I’m going to talk about now is if you’re dealing with a brokerage firm. When you deal with a brokerage firm and you buy a stock… I don’t know how to say this kindly. They can roll the commission into the price of the stock, so you never see that extra quarter or 3/8th’s, that’s rolled into the price of the stock, and you think that you’re getting that commission free. You’re not.
BRIAN: I promise you that there are hidden costs with your banker or broker as they buy stocks and bonds for you. So, I haven’t gotten into mutual funds yet. Now how do you…
MIKE: Let me try and interrupt here real quick because things are changing. There’s more tools available for the consumer to know if they’re getting the right price or not. Instead of just be cynical and assume that everyone’s out to get you, are there ways to get around this or to double check to make sure that you are getting the right stock?
BRIAN: Well the DOL rules looks like they’re getting pushed back and pushed out, so the transparency that we operate with as fiduciaries to our clients… by the way, a series 65 license fiduciary cannot do what I’m describing. We are fee only on the security side. We cannot charge a commission, hide a commission in a bond or stock purchase. One of the easiest ways to get rid of this is to deal with a fiduciary, but Elizabeth Warren’s DOL regulations that were coming in in January are being pushed out, and the Trump administration, it appears that there’s going to be major changes to that.
BRIAN: While I’m not a fan of all of it, we are already operating on a fiduciary level so there weren’t a lot of chances to us. What I was most excited for is the transparency that is owed the investor to see the costs that are there. So, if you’re dealing with a banker or a broker and you’re not… you should request a breakout of your stock and bond purchases. I’ll just leave it at that.
MIKE: What did Art Levitz say? He was the former SEC Chairman and he had a great quote but I can’t remember it.
BRIAN: He said if you have more than 50,000 to invest you should fire your broker and deal with a fiduciary, an investment advisor.
MIKE: That’s a pretty bold statement from the chairman of the SEC.
BRIAN: Right, and then Warren Buffett said that dealing with a stock broker is like dealing with a doctor who gets paid more for recommending certain medicines and is changing them all the time… I’m going to mess up this one. It’s more complicated.
MIKE: Doesn’t he get paid more by what The House is promoting, and like he gets more money by changing medicines instead of giving the one you actually need to get better?
BRIAN: Right.
MIKE: Something to that effect.
BRIAN: Something to that effect. Anyhow, it’s you’re much better off in dealing with a fiduciary is the point. Okay, now let’s get into mutual funds. Mutual funds are easily and by far the minefield of what’s out there for hiding costs. So, when it comes to the different mutual funds that are out there there’s A shares, B shares, C shares, there’s I shares, so let’s talk about a few of these.
BRIAN: There’s different costs that are there to buy a mutual fund. One cost is a frontend load. I hope you know, Decker Talk Radio listeners, that frontend loads should have the way of the buggy whip by now. There are so many amazingly good mutual funds that if your banker or broker is selling you a mutual fund with a frontend load that’s an unnecessary cost in my opinion. You shouldn’t be paying any upfront loads with so many wonderful mutual funds that are available on a no load basis. That’s my opinion, number one.
BRIAN: Number two; there are backend loads. Those are even worse because if you pay a frontend fee of five percent on a frontend loaded fund on 100,000, you’ve paid 5,000 dollars of unnecessary commissions, but if you buy a backend loaded fund on 100,000 there’s no frontend fee but hopefully that 100,000 over the years has grown to 200,000. Now you pay a three percent fee on a backend loaded fund and you think that you’re getting a better deal. You’re not. You are now paying 6,000 dollars when you sell it.
BRIAN: Again, my opinion, but I hope that you never pay a frontend or a backend loaded commission on a mutual fund because too many of them are fantastic, and they are available with no frontend or backend fee. A share is typically what we buy, and you’ll want to always make sure that you get either A shares or I share for institutional shares. Those are typically the lowest cost funds.
BRIAN: B shares are backend loaded fund. C shares are 12b-1’s. Now 12b-1’s is where there’s no frontend or backend fee but the broker is paid one percent or some fee every year you own it. He gets paid every year you own it, so guess what? A lot of bankers or brokers will tell you that they’re buying you 12b-1 funds where there’s no frontend or backend fee, but they do not disclose that they’re getting paid on their annual feels, so guess why they want you to stay in the stock market in buy and hold?
BRIAN: It’s because it’s tied directly to how they get paid. This is a sore point for me because it’s not in the client’s best interest to keep your money at risk to the extent that bankers and brokers do. In contrast, at Decker Retirement Planning in Kirkland at Carillon Point in Kirkland we would should you in our distribution plan that the typical client we have in retirement has 75 percent of their investable funds no risk.
BRIAN: 25 percent at-risk, but the 25 percent that is at risk is we’ve shrunk the risk down quite a bit because these are two sided models that are designed to make money in up or down markets, and the 75 percent that has no risk still is able to participate in some of the upside of the stock market. So, we have the combination that I think maximizes the return, minimizes the risk for someone who is retired. I’m just saying. Okay, now let’s talk about management fees.
BRIAN: When it comes to management fees, and again I’m passionate about this, about three or four years ago, Schwab Fidelity and Vanguard came out with someone called robo-investing. Robo-investing is where you have a risk questionnaire given to you which you fill out and then you submit. The computer then chooses a diversified portfolio of ETF’s, exchange traded funds, and so you’re able to minimize your costs by using ETF’s because there’s no management fees, and on top of that since it’s robo-investing there is no management fees and your portfolio is reallocated or reconfigured every day.
BRIAN: So, you have a rebalanced. So, you have a fantastic diversification of ETF’s that have a buy and hold strategy that is rebalanced on a daily basis. Your costs are minimized and there’s no management fee. Anyone who’s paying a buy and hold manager where their investment strategies don’t beat the indexes most of the time and are paying a management fee on top of that you’re uninformed.
BRIAN: I don’t know how else to say it. You are just flat out uninformed about robo-investing. There’s no reason to pay a manager for a buy and hold strategy, period, not when there’s robo-investing and you can simply do it yourself. So, Mike, when it comes to the hidden costs of dealing with a banker or broker those are the major things. The things that made me sick on top of that was a banker or broker will do some little tricks to help keep their clients happy.
BRIAN: For example, on this one they’ll sell their winners because they don’t want to be accused of, quote, unquote, not making money with you. So, when you have stocks go up they’ll prematurely sell them to book that gain, and pretty soon after six or eight months with a banker or broker you’ve sold all your winners and all you have are losers, and you’re not going to outperform the markets with a strategy where you’re constantly selling your winners, number one. The other thing is, the banker or broker that’s trying to keep you happy and say the right things, they will be going most cautious and have you in CD’s at market bottoms, and they’ll be most aggressive and have you mostly invested during market tops.
BRIAN: That’s a recipe in a market cycle of seven or eight years where your returns will get butchered by dealing with a banker or broker. Our approach is mathematical. We use quantitative algorithms, computer trend following models on a risk portfolio that made money in 2000, ’01 and ’02, when people lost 50 percent. The models we’re using right now made money, and then ’03 to ’07 when the markets doubled so did these models. In ’08 when the markets lost over 37 percent the models we’re using collectively made money.
BRIAN: And then for March of ’09 to present where the markets went up 150 percent these models did too. In fact, 100,000 invested in the S&P 500 with dividends reinvested January 1 of 2000 to present, so a little over 16 years. 100,000 grows to just over 200,000, average annual return is around four percent. 100,000 invested in the models we’re using right now, grows to over 900,000, average annual return is 16.5 percent net of fees.
BRIAN: This is a good time, Mike, to have an offer to have people come in and see the quantitative computer driven models that are two-sided models, trend following, that their banker and broker have never talked to them about.
MIKE: So, I want to just to ask you though before we send that offer, the fundamental difference between robo-investing which are robots, or two-sided trend following models which is almost like a different kind of robot. Can you replicate a two-sided trend following model with the robots that Vanguard are doing, or is ours different?
BRIAN: Oh, that’s a good clarification, Mike. Buy and hold, if you’re going to do buy and hold you should do robo-investing and not pay a management fee. You will get nailed every seven or eight years. You’ll take the full 30, 40, 50 percent hit, but you would’ve done that with a manager anyhow, so yeah. There’s a big difference between our models that are two-sided strategies in a two-sided market. There’s a strategy for an up market, there’s a strategy for a down market. In a two-sided strategy, these models were able to make, not lose money in the down markets that have happened in the last 16 years, not so with robo-investing.
BRIAN: They’ll get nailed, but you’re getting nailed without paying a one percent fee for getting nailed.
MIKE: Let me ask you this. I’ll rephrase the question a little bit differently. Can you replicate what our two-sided trend following models are doing with the robot functionality that Fidelity, Vanguard, these other places are using? Can the robots do what we’re doing?
BRIAN: No, no. Their buy and hold strategy is a one-sided strategy in a two-sided market. Again, that’s a great clarification.
MIKE: Okay, so it’s just different robots doing different things, and ours are trend following T-sided models which is huge.
BRIAN: Right.
MIKE: Brian, before we go into the next moment here, does that wrap up, in your opinion, the hidden costs and pull the curtains back from bankers and brokers and what’s going on there?
BRIAN: Yes, and now I want to jump into tax reform.
MIKE: Okay, well let’s just right in there. It seems like it’s moving a lot with Trump in office.
BRIAN: Okay, so this is the first part of what we know because tax reform hasn’t been formally announced yet. We’re just piecing together some of what’s coming out. John Maulden is a great contributor. I highly recommend anyone who is a Wall Street or economic student to Google John Maulden. He’s spectacular. I’m going to share and paraphrase some of what he’s got here.
BRIAN: There’s a far more sweeping proposed tax reform in the Trump tax reform than the Reagan’s tax forms in 1980. They’re not even in the same league. When I tell you that it touches everything I mean it touches everything, and not just in the United States. When you begin to think it through, the global implications are truly staggering. If you can think you can be in Europe, Asia, Africa, and just be an unaffected observer to these tax changes then you’re not paying attention. They’ll have, they meaning the tax changes, the tax reform, will have profound implications for currency evaluation and global trade.
BRIAN: There will be clear winners and losers. For example, Apple, the iPhone, will soon be manufacturing the iPhone 9 or 10 in the United States, but producing those iPhones here won’t create that many jobs because the work will be done on a robotic assembly line. If the border adjustability tax, which we call the BAT, which is part of the proposed tax reform happens, Apple will onshore that production even faster. Why? Because the most of the tax advantage country in which to produce products will be the United States with a low corporate tax rate combined with the technology and the AI.
BRIAN: Other countries might over zero taxes but they don’t have the infrastructure and the available talent that the United States does. In the proposed tax reform, 100 percent of investments will be allowed to be written off in the first year. If you build a factory, forget amortization. Write it all off in this year. Everything but the land will be 100 percent write off. Not only will that policy create construction jobs, it will create jobs for people who make the equipment that goes into the production lines as well as jobs for people who work in these plants.
MIKE: I think I heard about Toshiba considering Tennessee as another company just to throw out there.
BRIAN: Right. The jobs are coming because we have the combined technology and trained skilled workforce along with robotization [PH], [LAUGH] of the workforce, the technology, and a low corporate tax rate. So, we’ll have something called creative destruction. When buggy whips were replaced, those jobs were just reshuffled differently into different areas. When candles were replaced by the light bulb, those jobs were re-jiggered [PH] into another place.
BRIAN: So, imagine the robotization of our workforce. It’s coming and AI is coming, so creative destruction is going to re-jigger a lot of people’s jobs, and that will be the attraction of more jobs, more facilities and factories coming to the United States.
MIKE: Well it makes me think of the new Willy Wonka, The Chocolate Factory, the dad, do you remember this, the Tim Burton version where the dad gets replaced. Instead of filling up the toothpaste he now repairs the machine. He got education on the side and now he repairs the machine that took his job and makes more money.
MIKE: So, it’s just a different environment. A lot of things can change.
BRIAN: Yep, yep. Okay, where we want to finish the program is the six foundational pillars of any retirement plan. This is our opinion. Again, here again I hope that if you have a piece of paper and a pencil I hope you jot a note down, and if you’re driving I hope that you go back to our website and pull this up. If you’re with a banker or broker, or if you’re doing this yourself I hope that you know that these six are critically important part of your retirement plan.
BRIAN: Number one is to deal with a fiduciary. Unless you’re doing this yourself you shouldn’t deal with a sales person who is incented to sell you things that you may or may not need in order to get a large commission. What’s a couple examples of that? Variable annuities are horrible, horrible. That’s where the broker makes eight percent right up front. He gets paid every year you own it. The insurance company gets paid every year you own it. The mutual fund company gets paid every year you own it. Three layers of these that usually add up to five to seven percent before you make a dime. They’re a scam.
BRIAN: They don’t protect you on the downside. They lag the market on the upside because of all the fees, and the quote, unquote insurance that you have backing your investment is on your life. You don’t benefit at all. You have to die to get any benefit on the guaranteed side, so we don’t like them. We don’t use them. We call them a scam and there’s a saying in the business that variable annuities aren’t bought, they’re sold. Meaning that if you had any idea of all of these costs that are tied into these things you would never own one, so there’s an example of someone…
BRIAN: Oh, another one is non-traded REITs, there’s one. That’s where the banker or broker makes 12 percent or more in commission. They make a lot of money. So, if you deal with a fiduciary, number one, you get rid of all of the securities commissions and go to a fee based environment where everything is above board. Now you’ve got a fee-based advisor that is required by law to put our client’s best interest before…
BRIAN: It’s required to put our client’s best interest before our company’s best interest and who has regular suitability examinations by the state of Washington officials to make sure that what we are recommending to our clients is suitable and fits the fiduciary standard.
MIKE: Can I put that into perspective here? I think this is very important. If you want to buy a Jeep you would be crazy to go to Toyota and say hey, should I buy this Jeep? They’re not going to say oh, Jeep’s a great company, you should go do that. They’re going to try and sell you their product that makes them money.
BRIAN: Right.
MIKE: They’re not going to say, you know, based on what you’re trying to accomplish with your vehicle that you should get that Jeep. It just doesn’t make any sense.
MIKE: A fiduciary’s going to be essentially someone that could sell you any car, any price, new, used, any feature. Just it’s a different concept altogether and a completely different game. So, all right, well let’s keep going on these pillars here. I believe are there four pillars?
BRIAN: There’s six.
MIKE: Six pillars today.
BRIAN: There’s six. So, the first pillar is to deal with a fiduciary. The second is to make sure that you have the income that you need and want for the rest of your life. How can you know how much income you can draw? If you have a pie chart you can’t know that. You’ve got to come in and you’ve got to do to the math to find out with the assets that you’ve got that you’ve saved based on your age, and how much you spend, and your other sources of income are you going to make it to age 100 and make sure that that income lasts a lifetime.
BRIAN: We will do the calculations to make sure that you know if you have the income you need and want for the rest of your life. That is pillar foundational item number two. If you have the income that you need and want for the rest of your life, then a lot of other bad things could go away. We want to make sure that that income is there. Number three; we want to make sure that the taxes that you pay are minimized. The takes on lines eight and nine on your dividends and interest for your mutual funds that are reinvested, the taxes that you pay on income when you pull money out of a retirement account, the taxes on your retirement account.
BRIAN: How much should you convert from an IRA to a ROTH, we have that number to the dollar by the way, and minimizing any estate taxes at the state or federal level, and taxes of transferring your assets to your beneficiaries. All of those taxes we want to minimize and we have a conversation about each one. That’s number three. Number four is risk reduction. Chances are you’re taking far too much risk. If you’re dealing with a banker or broker, or you’re doing this yourself chances are you’re taking unnecessary levels of risk, and the timing is very important right now because we’re in year nine of what’s typically a seven or eight-year market cycle.
BRIAN: So, if you’re managing your own or you are in retirement and you’re dealing with a banker or broker I would bet you my house… I shouldn’t say that. Retract that.
MIKE: You’re being hyperbolic here, a figurative of speech.
BRIAN: Yeah, okay. I would say 97, 8-plus percent of you out there are taking far too much risk because you’re dealing with a banker or broker that’s trying and has financial incentives to keep you and risk investments far too much.
MIKE: What’s the statistic? Isn’t it 85 percent of money managers can’t even keep up with the S&P which seems like that should be the bare minimum standard?
BRIAN: Right, but we see this all the time, Mike. When clients come in they have most of their money at-risk. It’s at-risk in bond funds, and stock funds, and REITs, and all kinds of things. So anyhow, we want to minimize your risk by taking far less risk. Like I said, typical plan has 75 percent of your investable assets that are principle guaranteed in laddered principle guaranteed accounts.
BRIAN: So, in the next 20 years you can see, our clients can see, that they’re drawing income from principle guaranteed accounts. Why is that priceless? Because when the markets get creamed every seven or eight years they don’t have to worry. Their income is coming from principle guaranteed accounts. They don’t have to worry about the stock market. They don’t have to worry about interest rates. They don’t have to worry about the economy. They don’t have to worry about anything because those accounts are principle guaranteed and it keeps them in retirement.
BRIAN: The number one destroyer of people’s retirement is stock market crashes far beyond the inflation. It’s stock market crashes every seven or eight years to have 30 or 40 percent of your assets erased is really rough. Okay, number five is asset protection. So, the six foundational pillars in a retirement plan; number one, deal with a fiduciary, number two, make sure you have the income you need and want for the rest of your life, number three is tax minimization, number four is risk reduction which we just talked about, and number five is asset protection.
BRIAN: Asset protection deals with making sure that the assets that you’ve taken a lifetime to accumulate are protected. So, this is insurance on your life, insurance on your car, your house. This is protection against catastrophic healthcare cost like long term care insurance and its liability insurance using umbrella policies. It would be a tragedy to have someone do everything right and then right when you’re retiring bump someone in the parking lot, and they grab their neck, and they’re going to sue you for seven figures.
BRIAN: So, we want to make sure that you have everything buttoned up and protected, and this is part of the fifth pillar; asset protection. So, that leaves number six. Number six is to make sure that you’ve got liquidity in your portfolio for rainy day situations, emergency cash. We make sure all our clients have some emergency cash because when life happens, when stuff happens, that you have the cash to be able to buy a new car, to help pay the bills for a new roof, or a water heater, or whatever it is, whatever life throws at you.
BRIAN: Now on the one hand when it comes to liquidity if all of your money… Here at Decker Retirement planning if all of your money is liquid that means it’s not working for you. If all of your money is locked up that’s equally silly, so we try to shoot for about 30, 40 percent liquidity, and by liquidity we mean next day liquid in your savings, checking account, next day, no penalty. That’s what we target for our retirement plans. So, we want to make sure that you’ve got some of your money. All of your money is working for you, but that your money liquidity so that you sleep at night.
BRIAN: So, those are the six foundational pillars in a retirement plan.
MIKE: I think we should be talking about taxes at least a little bit every single show, and there’s a number of things that you can talk about for taxes. I like that John Hamm, the H&R Block tax commercial where it’s, you know, when your tax is back, because yeah, you can file taxes a number of different ways and the IRS is going to accept all of them, so you need to defend your taxes. You need to make sure that you file correctly. So, this week, let’s do a little tax tidbit on minimizing your taxes.
BRIAN: Okay, when we talk about tax minimization there is four parts to it and I want to go into more detail for the last ten minutes, is that all right?
MIKE: Yeah.
BRIAN: So, at Decker Retirement Planning the first thing we look at is lines eight and nine on your 1040. That is dividends and interest for typically we see mutual fund reinvested assets that accumulate there, and we see all the time 10, 15, 20,000 or more, so people are paying four to six thousand dollars typically on money that they never even spent. It’s an inefficiency that we fix one or two ways.
BRIAN: Either number one, we pull that money out and move those funds over to retirement plans. We just repurchase those mutual funds in retirement plans to get the benefit of reinvested shares so that you’re not taxed on it, so that’s number one. Number two, we turn that spigot on so that you’re no longer reinvesting, but that you are taking that income yourself because ideally the only taxes you pay on your plan is on your income.
BRIAN: And when it comes to the income we want minimize that as well, and we’ll talk about that in a second. The taxes that you have on your income for the larger accounts are important that we look at, and this is number two, foundations, limited partnerships, Nevada corporations. There’s different ways that we can minimize the taxes on your income and we use those for the larger estates, the estates of three million or more.
BRIAN: Number three; we want to look at the IRA to ROTH conversions. The ROTH conversion is something that is golden and so golden that we have, in our plan, we have a column that’s golden color for this specific reason. How much of your IRA should you convert to a ROTH? That’s a mathematical decision and we run the math this way. The benefit of a ROTH is to grow tax-free, number one, contribute income or distribute income back to you, number two, and transfer to your beneficiaries tax-free, number three.
BRIAN: So, the ROTH account is where we put our risk money. It’s the fastest growing account and we want to have that money grow tax-free and be able to justify paying 20 percent tax on that account. If you’ve got a one, or two, or three percent growth vehicle and you pay 20 percent tax on it, and you’re going to be drawing that back as income in the next 10 or 15 years you’re destroying the use of a ROTH account. Let’s use common sense here.
BRIAN: We show you in our distribution planning how much money to the dollar that you should be converting from an IRA to a ROTH. So, let’s say we do a great job of managing money for you and we grow your 250,000 dollar IRA in 20 years to 1.2 million dollars. If we did that you’d be happy with us I’m sure, but now in your mid-80’s we’ve put you in a position to where you’re paying taxes on 1.2 million. We’ve put you in the highest tax bracket because of required minimum distributions, and you’re now not happy with us because you could’ve paid tax on that account at the 250,000 dollar level, and now you’re paying it on the 1.2 million.
BRIAN: So, we are very careful to make sure that you’re paying taxes wisely and proactively when it comes to your retirement accounts. Okay, fourth and final is estate planning, and on estate planning we want to make sure that we’re minimizing the taxes on your estate transfer. So, at the state of Washington level there’s a state tax of 2.2 million individually, 4.4 million as a couple, and there’s two basic attitudes when it comes to estate tax planning for our clients.
BRIAN: The first is where many smart people say gosh, whatever our kids get net of a state tax is more than we ever got. We’re not going to do anything. Whatever they get net of tax is fine with us, so they’ll be no estate tax planning for that couple. The other group would say I would roll over in my grave knowing that after a lifetime of paying my taxes I’m going to get dinged again, and they’re going to take a hunk of flesh after I’m dead. I’m not going to let that happen. It’s not about getting more to my kids.
BRIAN: It’s about saying enough is enough in the taxes that I pay, and those people will have strategies that include life insurance trust and the typical strategies that allow us to zero out estate tax very easily. I just want to say that when it comes to estate tax planning, the easier estate tax solution was moving to Texas because there’s no estate tax in most of our 50 states.
BRIAN: So, look at where you want to retire, dial it up, see what states have estate taxes, and see if you’d be just as happy in Idaho, northern Idaho, as you are in western Washington. The climate’s similar but your grandkids may not be here, but whatever. Look and see what you’re looking at for estate taxes and where you live.
